Licensees and SOX compliance 1278

  • We are a US listed company that have licensees/distributors throughout Central and S. America. In these developing countries, our independant licensees may shortcut some regulatory procedures, without our knowledge, and consquently distribute our product which would not be compliant with local regulations and law. Could our company be liable under SOX for this type of conduct, and if so, suggestions on how to implement controls in place for licensees? Thanks…

  • Your question is challenging and at best, not possible to answer with precision or accuracy. This is true because many factors must be considered to determine if a SOX compliance issue can result directly or indirectly by unlicensed distribution or sales in a country in which the laws could consider the activity unlawful.
    For example, if unlawful in the country in which the product/service is sold, what is the financial impact in the home country where the financial information is reported? Is the impact material? Does the activity raise issue of ethics and governance by the reporting company?
    Suggestion: Quantify as much as possible the volume and related activity and conduct a quick What Can Go Wrong? ‘WCGW’ analysis. If in a worse case scenario, a reasonable risk of a material misstatement can arise or if the activity results in an undesierable control environment, it may lead to a SOX control deficiency, required disclosure, or material weakness in controls over financial reporting. On the other hand, SOX focuses on ICOFR, Internal Controls over Financial Reporting, not compliance or operational matters. For this reason, it might be considered not within scope. In the end, the determination of SOX relevance will be a decision the for external auditor and management involving judgment.

  • Thanks for helpful reply.

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